Fi-516

1. | Question : | (TCO C) Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15 percent debt and 85 percent equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment? (c) $950,000

(a) $205,000

(b) $500,000

(c) $950,000

(d) $2,550,000

(e) $3,050,000

Student answer:

Residual Dividend Model: Capital budget is $3,000,000 % Equity is 85% Net income is $3,500,000 Dividends paid = Net income - (% Equity * Capital budget) Dividends paid = $3,500,000 - (85% * $3,000,000) Dividends paid = $950,000

Instructor answer:

The amount of new investment which must be financed with equity is:

$3,000,000 x 85% = $2,550,000.

Since the firm has $3,500,000 of net income, $950,000 = $3,500,000 - $2,550,000 will be left for dividends.

|2. Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2011. | |

|At any time prior to maturity on February 1, 2031, a debenture holder can exchange a | |

|bond for 25 shares of common stock. What is the conversion price, Pc? | |

|SOLUTION: | |

Par value: $1,000.00

Conversion ratio: 25.00

Conversion price = Par value/Conversion ratio = $40.00

3. Ang Enterprises has a levered beta of 1.10, its capital structure...